Chapter 5 Section 5.2

Types of Accounts in a Bank Certificate of Deposit Money Market Accounts U.S. Savings Bonds Certificate of Deposit Money Market Accounts U.S. Savings Bonds

Certificate of Deposit Is often referred as a CD (not the music kind). Some info about CD’s Term – length a CD Principal – the original amount you put in. Maturity Date – when you can take the money out without penalty. Is often referred as a CD (not the music kind). Some info about CD’s Term – length a CD Principal – the original amount you put in. Maturity Date – when you can take the money out without penalty.

Three limitations for CD’s 1. Must leave money in bank for at least 3 months, but can be for 3 to 5 years. 2. Large penalty for taking money out early. 3. There is always a minimum amount that you must put in depending on the length of the CD. 1. Must leave money in bank for at least 3 months, but can be for 3 to 5 years. 2. Large penalty for taking money out early. 3. There is always a minimum amount that you must put in depending on the length of the CD.

Money Market Accounts Requires a minimum balance and earns interest that varies from month to month. Usually requires a larger initial investment than a regular checking or savings account. Penalty if the your balance goes below the minimum required balance. Can write a certain amount of checks. Requires a minimum balance and earns interest that varies from month to month. Usually requires a larger initial investment than a regular checking or savings account. Penalty if the your balance goes below the minimum required balance. Can write a certain amount of checks.

U.S. Savings Bonds Also know as…. Patriot Bonds Were bought during the war to help support the government support the troops when we were at war. Downside – Usually takes a long time to generate any interest from the bond. Also bonds purchased after 1997 incur a three month penalty if cashed before maturity date. Also know as…. Patriot Bonds Were bought during the war to help support the government support the troops when we were at war. Downside – Usually takes a long time to generate any interest from the bond. Also bonds purchased after 1997 incur a three month penalty if cashed before maturity date.

Savings Plans and Payment Methods Type of AccountBenefitsDrawback Regular SavingsLow Minimum balance Ease of withdrawal Insured Low rate of return Certificate of Deposit (CD) Guaranteed rate of return for time of CD Insured Possible penalty for early withdrawal Money Market Accounts Good Rate of Return Some Check writing Insured Minimum balance No interest and possible service charge if below a certain balance U.S. Savings BondsLow minimum deposit Guaranteed by the government Free from state and local taxes Lower rate of return when cashed in before bond reaches maturity date

Rate of Return Is the percentage increase in the savings from earned interest. Here is an example: Sally put her $75 in a savings account that earned $3 at the end of the year. How much was her rate of return. ($3.00/$75.00 =.04 or 4%) She had a 4% return on her investment. Look at worksheet Rate of Return Is the percentage increase in the savings from earned interest. Here is an example: Sally put her $75 in a savings account that earned $3 at the end of the year. How much was her rate of return. ($3.00/$75.00 =.04 or 4%) She had a 4% return on her investment. Look at worksheet

Compounding Interest Compounding means that we calculate interest for the account add that amount to the account and then recalculate it again with the new amount the next month.

The loooooong way to do compound interest Month Principal x Interest Rate Number of Months Interest 1(100 x 4%) (104 x 4%) ( x 4%) ( x 4%) ( x 4%) Mr. Prosser put $100 in his savings account that accumulated 4% interest that was compounded yearly. At the end of 5 years he compounded a total of

Now you do one…. Principal $250 Interest 2.5% 4 Years Principal $250 Interest 2.5% 4 Years Beginning Amount InterestEnding Amount *.025 =

Lets do another…. Sally puts 200 in the bank and it will be compounded monthly at 3%. How much do you have in your account after 5 years? M=P(1+i) n

Annual Percentage Yield (APY) Is the amount of interest that a $100 deposit would earn, after compounding, for one year. Easier definition – It is the amount of interest that you would accumulate on the account if you did not deposit or withdrawal anything from this account. So if you deposited 100 dollars and got 105 dollars at the end of the first year the APY would be 5% Is the amount of interest that a $100 deposit would earn, after compounding, for one year. Easier definition – It is the amount of interest that you would accumulate on the account if you did not deposit or withdrawal anything from this account. So if you deposited 100 dollars and got 105 dollars at the end of the first year the APY would be 5%

The Rule of 72 The most important and simple rule to financial success.

Rule of 72 72=Years to Interest Rate double investment (or debt) The answers can be easily discovered by knowing the Rule of 72 The time it will take an investment (or debt) to double in value at a given interest rate using compounding interest. The answers can be easily discovered by knowing the Rule of 72 The time it will take an investment (or debt) to double in value at a given interest rate using compounding interest.

Albert Einstein “It is the greatest mathematical discovery of all time.” Credited for discovering the mathematical equation for compounding interest, thus the “Rule of 72” T=P(I+I/N) YN

What the “Rule of 72” can determine How many years it will take an investment to double at a given interest rate using compounding interest. How long it will take debt to double if no payments are made. The interest rate an investment must earn to double within a specific time period. How many times money (or debt) will double in a specific time period. How many years it will take an investment to double at a given interest rate using compounding interest. How long it will take debt to double if no payments are made. The interest rate an investment must earn to double within a specific time period. How many times money (or debt) will double in a specific time period.

Things to Know about the “Rule of 72” The “Rule of 72” Is only an approximation The interest rate must remain constant The equation does not allow for additional payments to be made to the original amount Interest earned is reinvested Tax deductions are not included within the equation The “Rule of 72” Is only an approximation The interest rate must remain constant The equation does not allow for additional payments to be made to the original amount Interest earned is reinvested Tax deductions are not included within the equation

Doug’s Certificate of Deposit Invested $2,500 Interest Rate is 6.5% Invested $2,500 Interest Rate is 6.5% 72=11 years to double investment 6.5% Doug invested $2,500 into a Certificate of Deposit earning a 6.5% interest rate. How long will it take Doug’s investment to double?

Another Example The average stock market return since 1926 has been 11% Therefore, every 6.5 years an individual’s investment in the stock market has doubled The average stock market return since 1926 has been 11% Therefore, every 6.5 years an individual’s investment in the stock market has doubled 72=6.5 years to double investment 11%

Jessica’s Credit Card Debt $2,200 balance on credit card 18% interest rate $2,200 balance on credit card 18% interest rate 72=4 years to double debt 18% Jessica has a $2,200 balance on her credit card with an 18% interest rate. If Jessica chooses to not make any payments and does not receive late charges, how long will it take for her balance to double?

Another Example $6,000 balance on credit card 22% interest rate $6,000 balance on credit card 22% interest rate 72=3.3 years to double debt 22%

Jacob’s Car $5,000 to invest Wants investment to double in 4 years $5,000 to invest Wants investment to double in 4 years 72=18% interest rate 4 years Jacob currently has $5,000 to invest in a car after graduation in 4 years. What interest rate is required for him to double his investment?

Another Example $3,000 to invest Wants investment to double in 10 years $3,000 to invest Wants investment to double in 10 years 72=7.2% interest rate 10 years

Rhonda’s Treasury Note 72= 9.6 years 7.5%to double investment AgeInvestment 22$2, $5, $10, $20, $40,000 70$80,000 Rhonda is 22 years old and would like to invest $2,500 into a U.S. Treasury Note earning 7.5% interest. How many times will Rhonda’s investment double before she withdraws it at age 70?

Another Example $500 invested at age 18 7% interest How many times will investment double before age 65? $500 invested at age 18 7% interest How many times will investment double before age 65? 72=10.2 years 7%to double investment AgeInvestment 18$ $1, $2, $4, $8,000 69$16,000

Conclusion continued Things individuals must remember about the Rule of 72 include: Is only an approximation The interest rate must remain constant The equation does not allow for additional payments to be made to the original amount Interest earned is reinvested Tax deductions are not included within the equation Things individuals must remember about the Rule of 72 include: Is only an approximation The interest rate must remain constant The equation does not allow for additional payments to be made to the original amount Interest earned is reinvested Tax deductions are not included within the equation

Types of Checking Accounts Three main categories: Regular Active Interest-Earning (Bearing) Three main categories: Regular Active Interest-Earning (Bearing)

Checking accounts Regular Checking Accounts Non- Interest bearing No minimum required balance Usually no extra fees Activity Accounts Used if you write very few checks from this account and unable to stay above the minimum balance. Fee for each check you write and sometimes a fee for each deposit you put into the bank. Also a monthly service fee for this account. Regular Checking Accounts Non- Interest bearing No minimum required balance Usually no extra fees Activity Accounts Used if you write very few checks from this account and unable to stay above the minimum balance. Fee for each check you write and sometimes a fee for each deposit you put into the bank. Also a monthly service fee for this account.

Interest-Earning (Bearing) Accounts A combination between checking and savings accounts. These accounts pay interest if you maintain a minimum balance. If you drop below minimum – fees are charged. A combination between checking and savings accounts. These accounts pay interest if you maintain a minimum balance. If you drop below minimum – fees are charged.

Evaluating Checking Accounts What should I look for when getting a checking account? Restrictions Minimum balance Number of checks or deposits Fees and Charges Service charge for Check printing Overdrafts Stop-payments What should I look for when getting a checking account? Restrictions Minimum balance Number of checks or deposits Fees and Charges Service charge for Check printing Overdrafts Stop-payments

Interest Interest Rates Frequency of compounding The way interest is calculated all affect interest bearing checking accounts Special Services Overdraft protection Interest Interest Rates Frequency of compounding The way interest is calculated all affect interest bearing checking accounts Special Services Overdraft protection

Comparing checking accounts worksheet

Using a Checking Account Opening a checking account Signature Card Individual or Joint Accounts Individual Your name is the only name on the account Only one that can write checks and make deposits Joint Accounts Also called a “or” account Two names on an account, either name can make deposits or withdrawals on the account Opening a checking account Signature Card Individual or Joint Accounts Individual Your name is the only name on the account Only one that can write checks and make deposits Joint Accounts Also called a “or” account Two names on an account, either name can make deposits or withdrawals on the account

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Writing a checks Printed name andAddress ofdepositor Check No. Your Name Mocking Bird Lane St. Louis, MO PAY TO THE ORDER OF $ DOLLARS St. Louis Bank company Memo: 2: : Name of the Person you are writing the check to. Amount for the Check Date of the Check Amount in Words Name of Bank checks were issued from. Routing Number Account Number Why the check was written Signature Line

Check Register The check register is the where we keep track of all of the checks we have written. No days there are carbon copies, and electronic displays of checks. The check register is the where we keep track of all of the checks we have written. No days there are carbon copies, and electronic displays of checks.

Example of a Check Register Check Register Check NumberDateDescription of Transaction Payment/Debit (-) Fee (If Any)Deposit/Credit (+)Balance /15Utilities – Gas /18 Car Payment Birthday Present

Writing the number When you write a number it has to be written out fully…. For example: $ One hundred twenty-five and 56/100 Practice these $ One thousand two hundred thirty-four and 56/100 $34.76 Thirty-four and 76/100 When you write a number it has to be written out fully…. For example: $ One hundred twenty-five and 56/100 Practice these $ One thousand two hundred thirty-four and 56/100 $34.76 Thirty-four and 76/100

Lets write a few checks Mr. Prosser decides to pay his bills on Saturday. Here are the bills he needs to pay Gas Bill $79.25 (Laclede Gas) Car Payment $1, (GMAC) Computer Repair –Circuit City $ Birthday gift from Grandpa $50 Mr. Prosser decides to pay his bills on Saturday. Here are the bills he needs to pay Gas Bill $79.25 (Laclede Gas) Car Payment $1, (GMAC) Computer Repair –Circuit City $ Birthday gift from Grandpa $50

Your Name Mocking Bird Lane St. Louis, MO PAY TO THE ORDER OF $ DOLLARS St. Louis Bank company Memo: 2: :

Check Register Check NumberDateDescription of Transaction Payment/Debit (-) Fee (If Any)Deposit/Credit (+)Balance /3Laclede Gas Company /3/10 GMAC /3/10 Circuit City /3/10Birthday Gift

Your Name Mocking Bird Lane St. Louis, MO PAY TO THE ORDER OF $ DOLLARS St. Louis Bank company Memo: 2: :

Check Register Check NumberDateDescription of Transaction Payment/Debit (-) Fee (If Any)Deposit/Credit (+)Balance /3Laclede Gas Company /3/10 GMAC /3/10 Circuit City /3/10Birthday Gift

Your Name Mocking Bird Lane St. Louis, MO PAY TO THE ORDER OF $ DOLLARS St. Louis Bank company Memo: 2: :

Check Register Check NumberDateDescription of Transaction Payment/Debit (-) Fee (If Any)Deposit/Credit (+)Balance /3Laclede Gas Company /3/10 GMAC /3/10 Circuit City /3/10Birthday Gift

Making Deposits Deposit Slip – A formal bank document declaring that you wish to put money into a bank. Deposit Slip – A formal bank document declaring that you wish to put money into a bank.

Check Register Check NumberDateDescription of Transaction Payment/Debit (-) Fee (If Any)Deposit/Credit (+)Balance /3Laclede Gas Company /3/10 GMAC /3/10 Circuit City /3/10Birthday Gift

Making Deposits Deposit Slip – A formal bank document declaring that you wish to put money into a bank. Comprises of lines that have checks and cash. When depositing checks 3 ways to sign a check Blank Endorsement Restrictive Endorsement Special Endorsement Deposit Slip – A formal bank document declaring that you wish to put money into a bank. Comprises of lines that have checks and cash. When depositing checks 3 ways to sign a check Blank Endorsement Restrictive Endorsement Special Endorsement

Blank endorsement Easiest of endorsement – just sign the back of the check. Easiest to steal, loose the check someone else can sign underneath and cash your check. Restrictive Endorsement Check holders signature and how the check should be used. “For Deposit ONLY” Blank endorsement Easiest of endorsement – just sign the back of the check. Easiest to steal, loose the check someone else can sign underneath and cash your check. Restrictive Endorsement Check holders signature and how the check should be used. “For Deposit ONLY” For Deposit Only

Special Endorsement Allows you to transfer a check to an organization or another person. Pay to the order of …….. Special Endorsement Allows you to transfer a check to an organization or another person. Pay to the order of …….. Pay to the order of

More about check writing If you make a mistake it is better to VOID the Check than to erase it. VOID If you lose a check or get a check stolen. You may do what is called a STOP-PAYMENT ORDER. Usually a fee is attached to this from 10 to 20 dollars If you make a mistake it is better to VOID the Check than to erase it. VOID If you lose a check or get a check stolen. You may do what is called a STOP-PAYMENT ORDER. Usually a fee is attached to this from 10 to 20 dollars

Voided Check Your Name Mocking Bird Lane St. Louis, MO PAY TO THE ORDER OF $ DOLLARS St. Louis Bank company Memo: 2: : VOID Back

Clearing a Check What does it mean for a check to clear? A bank usually holds on to your check until they find out that the bank where the check was written from has enough money. What does it mean for a check to clear? A bank usually holds on to your check until they find out that the bank where the check was written from has enough money.

Keeping Track of a Checking Account Bank Statement

Bank Reconciliation Is a report that accounts for the differences between the bank statement and a checkbook balance. Used to help “BALANCE YOUR CHECKBOOK” Is a report that accounts for the differences between the bank statement and a checkbook balance. Used to help “BALANCE YOUR CHECKBOOK”

Bank Reconciliation PLEASE EXAMINE YOUR STATEMENT AT ONCE ANY DISCREPANCY SHOULD BE REPORTED TO THE BANK IMMEDIATELY.Checks Outstanding NumberAmount 1. In your checkbook, record any transactions appearing on this statement but not yet listed. 2. list any checks still outstanding in the space provided to the right. 3. Enter the balance shown on this statement here. 4. Enter deposits recorded in your checkbook but not shown on this statement. 5. Total lines 3 and 4 enter here. 6. Enter total checks outstanding here. 7. Subtract line 6 from line 5. This adjusted bank balance should agree with your checkbook balance. Total

Savings Plans and Payment Methods Type of AccountBenefitsDrawback Regular Savings Certificate of Deposit (CD) Money Market Accounts U.S. Savings Bonds